Universidade do Minho. Núcleo de Investigação em Políticas Económicas (NIPE)
Abstract
Given limited research on monetary policy rules in emerging markets, this paper
estimates monetary policy rules for five key emerging market economies: Brazil, Russia,
India, China and South Africa (BRICS) analysing whether the monetary authority
reacts to changes in financial markets, in monetary conditions, in the foreign exchange
sector and in the commodity price. To get a deeper understanding of the central bank’s
behaviour, we assess the importance of nonlinearity using a smooth transition (STAR)
model. Using quarterly data, we find strong evidence that the monetary policy followed
by the Central Banks in the BRICS varies from one country to another and that it
exhibits nonlinearity. In particular, considerations about economic growth (in the cases
of Brazil and Russia), inflation (for India and China) and stability of financial markets
(in South Africa) seem to be the major drivers of such nonlinear monetary policy
behaviour. Moreover, the findings suggest that the monetary authorities pursue, with
the exception of India, a target range for the threshold variable rather than a specific
point target. In fact, the exponential smooth transition regression (ESTR) model seems
to be the best description of the monetary policy rule in these countries.Fundação para a Ciência e a Tecnologia (FCT